Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships

for Disc

Matematika Aktuaria II

Pertemuan ke-2, 9 September 2015

Departemen Matematika FMIPA IPB

Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

Additional NLP Terminal Reserve Expresions

Additional NLP terminal reserve expressions for whole life

insurance:
äx+t
t Vx = 1 −
äx
Px+t − Px
t Vx =
Px+t − d
Ax+t − Ax
t Vx =
1 − Ax
 
Px
t Vx = 1 − Ax+t
Px+t
Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

Random Variable Analysis

The present value of loss random variable measured at time t,

given Kx∗ > t is
∗
t Lx = v Kx −t − Px äK ∗ −t|
x

= Zx+t − Px Ÿx+t (1)

This is illustrated in the following figure.

Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

Random Variable Analysis

Taking the conditional expectation in Equation (1), given Kx∗ > t

is

E(t Lx |Kx∗ > t) = Ax+t − Px äx+t , (2)

which is the prospective expression for the t th NLP terminal

reserve. Thus we conclude that if the level funding payment is
determined by the equivalence principle, then the NLP terminal
reserve is given by the conditional expected value of the
present value of loss random variable measured at time t.
The conditional variance of the present value of loss random
variable t Lx is

Px 2 2
  
Var (t Lx |Kx∗ > t) = 1+ Ax+t − A2x+t . (3)
d
Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

Random Variable Analysis

Example 2.1
Let 2 L = 1000 2 L1x:4| denote the present value of loss
random variable at duration 2 for a 4-year term insurance
of amount 1000 issued to (x), given Kx∗ > 2.
Find the value of Var (2 L), given the following values:
1
Px:4| = 0, 12; qx+2 = 0, 12; qx+3 = 0, 13; i = 0.
Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

Random Variable Analysis

Solution: We have
v = (1 + i)−1 = (1 + 0)−1 = 1, and we note
1
P = 1000 Px:4| = 1000(0, 12) = 120.
If failure occurs in (x + 2, x + 3], 2 L = 1000 − P = 880 with
probability 0, 12.
If failure occurs in (x + 3, x + 4], 2 L = 1000 − 2P = 760 with
probability (1 − 0, 12)(0, 13) = (0, 88)(0, 13) = 0, 1144.
If survival to age x + 4 occurs, which happens with
probability (0, 88)(0, 87) = 0, 7656, then
2 L = 0 − 2P = −240.
Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

Random Variable Analysis

We have then
E(2 L|Kx∗ > 2) =
(880)(0, 12) + (760)(0, 1144) + (−240)(0, 7656) = 8, 80.
E(2 L2 |Kx∗ > 2) = (880)2 (0, 12) + (760)2 (0, 1144) +
(−240)2 (0, 7656) = 203, 104.
Var (2 L|Kx∗ > 2) = 203, 104 − (8, 80)2 = 203026, 56.
Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

NLP Reserves for Contingent Contracts with Immediate Payment of Claims

Prospective expressions for the t th NLP terminal reserve for

such models are parallel to those deveioped earlier in this
section for models with benefit paid at the end of the year of
failure.
For the whole life model:

t V (Ax ) = Ax+t − P(Ax ) äx+t .

For the n−year term insurance model:

1 1 1
t V (Ax:n| ) = Ax+t:n−t| − P(Ax:n| ) äx+t:n−t| .
Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

NLP Reserves for Contingent Contracts with Immediate Payment of Claims

For the n−year term endowment insurance model:

t V (Ax:n| ) = Ax+t:n−t| − P(Ax:n| ) äx+t:n−t| .

For the n−year term insurance model with a limited

funding pattern over the first h years:
( 1 1
h 1 Ax+t:n−t| − h P(Ax:n| ) äx+t:h−t| , for t < h < n,
t V (Ax:n| ) = 1
Ax+t:n−t| , for h < t < n.
Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

NLP Reserves for Contingent Contracts with Immediate Payment of Claims

The retrospective reserve expression for the whole life model is

t V (n |äx ) = P(Ax )s̈x:t| − t k x ,

where
1 1
tkx = Ax:t| .
t Ex
Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

Additional understanding of the NLP reserve concept can

be obtained by examining how the reserve evolves from
one duration to the next. We will again make use of the
group deterministic interpretation as the easiest way to
present these ideas for the first time, and then move to a
stochastic presentation of the same concepts.
We focus on the single year of age from x + t to x + t + l,
which is the (t + 1)st year of the contingent payment
contract. This is illustrated in the following figure.
Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

Suppose lx persons each purchase an identical unit benefit

contingent contract with level annual benefit premium P. At
the end of the t th year there are lx+t alive (and hence lx+t
contracts in force).
Each contract carries an NLP terminal reserve of size t V at
that time, so the total aggregate reserve fund is lx+t (t V )
At the beginning of the (t + 1)st year each person pays a
premium of P, so the aggregate fund becomes

lx+t (t V + P) = lx+t (t+1 I),

where (t+1 I) = (t V + P) is called the (t + 1)st initial reserve

for the contingent contract.
Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

This aggregate initial reserve fund then earns interest at

rate i, and therefore grows to amount lx+t (t V + P)(1 + i) by
the end of the (t + 1)st year.
During that year dx+t contracts fail and lx+t+1 contracts
survive. The aggregate fund at time t + 1 must be
sufficient to pay the unit contingent benefit to each of the
dx+t that fail and establish the (t + 1)st NLP terminal
reserve for the lx+t+1 that survive.
Thus we have

lx+t (t V + P)(1 + i) = dx+t + lx+t+1 (t+1 V ).

If we divide both sides of equation by lx+t , we obtain

(t V + P)(1 + i) = qx+t + px+t (t+1 V ).

Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

By algebraic manipulation, we have

t+1 V = (t V + P)(1 + i) − qx+t (1 − t+1 V ).

Note:
(t V + P) is called the (t + 1)st initial reserve for the
contingent contract.
(1 − t+1 V ) is called the net amount at risk.
qx+t (1 − t+1 V ) is called the expected cost of insurance
based on the net amount at risk.
Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

Example 2.2
Given a whole life contract with net level annual premiums
issued to (x), the NLP initial reserve for year t is 200 and
the net amount at risk for year t is 1295.
Find the NLP terminal reserve for year t − 1, given the
following values:

äx = 16.20; qx+t−1 = 0.00386; i = 0.05.

Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

Example 2.3
Contingent payment contracts sometimes contain a refund
of premium feature, with or without interest.
Consider an n-year deferred annuity-due issued to (x), with
net level annual premiums paid during the deferred period.
The contract includes a benefit of return of net level
premiums paid, with interest at rate i, for failure during the
deferred period. The net level premium and the NLP
reserves are also calculated at rate i.
Find expressions for the net level annual premium and the
t th NLP terminal reserve, for t < n.
Net Level Premium (NLP) Reserves for Contingent Payment (Models with Annual Payment Funding) Recursive Relationships for Disc

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